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\noindent \textbf{Tortious Interference with Contracts: Why Punish It? }
\noindent May 5, 2004. Eric Rasmusen,
Erasmuse@indiana.edu, Php.indiana.edu/$\sim$erasmuse,\\
Php.indiana.edu/$\sim$ erasmuse/papers/tortious-rasmusen.pdf.
{\it Tortious Interference with Contract. }
Promisor breaches a contract in which he promised to perform in
Victim's theatre, causing damage of \$10 to Victim. Promisor does
this because Inducer, who was aware of the contract, made him a better
offer to perform that night. What damages should the court require
Promisor and Inducer to pay to Victim?
Four possible justifications for the
doctrine of tortious interference with contract are
malice, judgement-proofness, transaction costs,
and foreseeable court error.
\noindent
{\it The Information Story }
(1) Nature chooses the Victim's investigation cost, $x \geq 0$, using the density $f(x)$ (denote the cumulative probability by $F(x)$).
(2) The Victim pays $x$ if he wishes and learns which one of a large population of possible performers with average value $v=a$ actually has the higher value $v=a+b$.
(3) The Victim chooses a performer with whom to negotiate.
(4) The Victim and the chosen Performer bargain to choose a performance price $p_1$, which will be either $p_1=a$ (if $v$ is unknown) or some $p_1$ in the interval $(a, v)$.
(5) If the Inducer chooses to induce breach, the Inducer and the Performer bargain to choose a performance price $p_2$ in the interval $(p_1, v)$.
(6) If the Inducer induced breach, the court forces the Inducer to pay damages of $d$ to Victim.
(7) If the Inducer did not induce breach, the Performer may breach anyway. The court then forces him to pay expectation damages to Victim, which are zero in this case because $p_1>a$.
\noindent
{\it Payoffs:}
The Victim's payoff is $v-p_1$ if no breach occurs, minus $x$ if he discovered $v$ in advance. If the contract is breached, his payoff is $d$, or $d-x$ if he discovered $v$ in advance.
The Performer's payoff is the price he gets (either $p_1$ or $p_2$).
The Inducer's payoff is 0 if no breach occurs. Otherwise, it is $v - p_2 -d$.
\newpage
\noindent
{\bf The Investment Story }
(1) The Victim invests $x$ in the project, adding $f(x)$ to the base value of $a$ so that the value becomes $v=a+f(x)$.
(2) The Victim and the Performer bargain to choose a performance price $p_1$ in the interval $[a, a + f(x)]$.
(3) If the Inducer chooses to induce breach, the Inducer and the Performer bargain to choose a performance price $p_2$ in the interval $[p_1, v]$.
(4) If the Inducer induced breach, the court forces the Inducer to pay damages of $d$ to Victim.
(5) If the Inducer did not induce breach, the Performer may breach anyway. The court then forces him to pay expectation damages to Victim, which are zero in this case because $p_1>a$.
\noindent
{\it Payoffs:} The Performer's payoff is the price he gets (either $p_1$ or $p_2$).
The Victim's payoff is $v-p_1-x$ if no breach occurs. If the contract is breached, his payoff is $d-x$.
The Inducer's payoff is 0 if no breach occurs. Otherwise, it is $v - p_2 -d$.
BeVier, Lillian R. (1990) ``Reconsidering Inducement,'' {\it
Virginia Law Review}, 76: 877.
Epstein, Richard A. (1987) ``Inducement of Breach of Contract as a
Problem
of
Ostensible Ownership,''
{\it Journal of Legal Studies}, 16: 1, 3 ( 1987).
McChesney, Fred S. (1999) ``Tortious Interference with Contract versus
'Efficient' Breach: Theory and Empirical Evidence,'' {\it Journal of
Legal Studies},
28, 1: 136-186. (January 1999).
Landes, William M. \& Richard A. Posner (1980) ``Joint and Multiple
Tortfeasors:
An Economic Analysis,''
{\it Journal of Legal Studies}, 9: 517 (app. II).
Rasmusen, Eric (1995) ``Predictable and Unpredictable Error in Tort
Awards: The Effect of Plaintiff Self Selection and Signalling," {\it
International Review of Law and Economics } 15: 323-345 (September
1995).
{\it Lumley v. Gye}, 2 El. \& Bl. 216, 118 Eng. Rep. 749 (1853).
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